FORM 10-Q
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: December 31, 2002
Commission file number: 1-12214
CHAD THERAPEUTICS, INC.
| California (State of other jurisdiction of incorporation or organization) |
95-3792700 (I.R.S. Employer Identification No.) |
|
| 21622 Plummer Street, Chatsworth, CA 91311 | ||
| (Address of principal executive offices) (Zip Code) | ||
(818) 882-0883
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Shares |
10,076,000 |
CHAD THERAPEUTICS, INC.
Condensed Balance Sheets
December 31, 2002 and March 31, 2002
(Unaudited)
| December 31, | March 31, | |||||||||||
| 2002 | 2002 | |||||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash |
$ | 1,538,000 | $ | 520,000 | ||||||||
Accounts receivable, less allowance for
doubtful accounts of $107,000 at
December 31, 2002 and $76,000 at
March 31, 2002 |
2,825,000 | 2,333,000 | ||||||||||
Income taxes refundable |
— | 995,000 | ||||||||||
Inventories (Note 2) |
5,178,000 | 5,284,000 | ||||||||||
Prepaid expenses |
770,000 | 315,000 | ||||||||||
Total current assets |
10,311,000 | 9,447,000 | ||||||||||
Property and equipment, at cost |
6,166,000 | 5,972,000 | ||||||||||
Less accumulated depreciation |
4,817,000 | 4,320,000 | ||||||||||
Net property and equipment |
1,349,000 | 1,652,000 | ||||||||||
Other assets, net |
1,156,000 | 1,224,000 | ||||||||||
Total assets |
$ | 12,816,000 | $ | 12,323,000 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 780,000 | $ | 777,000 | ||||||||
Accrued expenses |
1,204,000 | 1,169,000 | ||||||||||
Income taxes payable |
31,000 | 4,000 | ||||||||||
Total current liabilities |
2,015,000 | 1,950,000 | ||||||||||
Shareholders’ equity: |
||||||||||||
Common shares, $.01 par value, authorized
40,000,000 shares; 10,076,000 and 10,059,000
shares issued and outstanding |
13,117,000 | 13,097,000 | ||||||||||
Accumulated deficit |
(2,316,000 | ) | (2,724,000 | ) | ||||||||
Total shareholders’ equity |
10,801,000 | 10,373,000 | ||||||||||
Total liabilities and shareholders’ equity |
$ | 12,816,000 | $ | 12,323,000 | ||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the three months ended December 31, 2002 and 2001
(Unaudited)
| Three Months Ended | |||||||||||
| December 31 | |||||||||||
| 2002 | 2001 | ||||||||||
Net sales |
$ | 4,931,000 | $ | 4,669,000 | |||||||
Cost of sales |
2,790,000 | 2,817,000 | |||||||||
Gross profit |
2,141,000 | 1,852,000 | |||||||||
Costs and expenses: |
|||||||||||
Selling, general and administrative |
1,690,000 | 1,582,000 | |||||||||
Research and development |
207,000 | 200,000 | |||||||||
Total costs and expenses |
1,897,000 | 1,782,000 | |||||||||
Operating income |
244,000 | 70,000 | |||||||||
Other income — interest income, net |
6,000 | 12,000 | |||||||||
Earnings before income taxes |
250,000 | 82,000 | |||||||||
Income tax expense |
22,000 | 1,000 | |||||||||
Net earnings |
$ | 228,000 | $ | 81,000 | |||||||
Basic earnings per share |
$ | .02 | $ | .01 | |||||||
Diluted earnings per share |
$ | .02 | $ | .01 | |||||||
Weighted shares outstanding: |
|||||||||||
Basic |
10,073,000 | 10,053,000 | |||||||||
Diluted |
10,364,000 | 10,738,000 | |||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the nine months ended December 31, 2002 and 2001
(Unaudited)
| Nine Months Ended | |||||||||||
| December 31 | |||||||||||
| 2002 | 2001 | ||||||||||
Net sales |
$ | 14,657,000 | $ | 14,622,000 | |||||||
Cost of sales |
8,308,000 | 9,172,000 | |||||||||
Gross profit |
6,349,000 | 5,450,000 | |||||||||
Costs and expenses: |
|||||||||||
Selling, general and administrative |
5,223,000 | 4,723,000 | |||||||||
Research and development |
695,000 | 605,000 | |||||||||
Total costs and expenses |
5,918,000 | 5,328,000 | |||||||||
Operating income |
431,000 | 122,000 | |||||||||
Other income — interest income, net |
15,000 | 43,000 | |||||||||
Earnings before income taxes |
446,000 | 165,000 | |||||||||
Income tax expense |
38,000 | 4,000 | |||||||||
Net earnings |
$ | 408,000 | $ | 161,000 | |||||||
Basic earnings per share |
$ | .04 | $ | .02 | |||||||
Diluted earnings per share |
$ | .04 | $ | .02 | |||||||
Weighted shares outstanding: |
|||||||||||
Basic |
10,070,000 | 10,053,000 | |||||||||
Diluted |
10,398,000 | 10,473,000 | |||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
Condensed Statement of Shareholders’ Equity
For the nine months ended December 31, 2002
(Unaudited)
| Common Shares | Accumulated | |||||||||||
| Shares | Amount | Deficit | ||||||||||
Balance at
March 31, 2002 |
10,059,000 | $ | 13,097,000 | $ | (2,724,000 | ) | ||||||
Exercise of stock options |
17,000 | 20,000 | — | |||||||||
Net earnings |
— | — | 408,000 | |||||||||
Balance at
December 31, 2002 |
10,076,000 | $ | 13,117,000 | $ | (2,316,000 | ) | ||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
Condensed Statements of Cash Flows
For the nine months ended December 31, 2002 and 2001
(Unaudited)
| Nine Months Ended | ||||||||||||
| December 31 | ||||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 408,000 | $ | 161,000 | ||||||||
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization of property and
equipment |
497,000 | 622,000 | ||||||||||
Amortization of intangibles |
83,000 | 86,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in accounts receivable |
(492,000 | ) | (726,000 | ) | ||||||||
Decrease (increase) in inventories |
106,000 | (1,153,000 | ) | |||||||||
Decrease (increase) in income taxes refundable |
995,000 | — | ||||||||||
Decrease (increase) in prepaid expenses |
(455,000 | ) | 187,000 | |||||||||
Decrease (increase) in other assets |
(15,000 | ) | (1,000 | ) | ||||||||
Increase (decrease) in accounts payable |
3,000 | 678,000 | ||||||||||
Increase (decrease) in accrued expenses |
35,000 | (31,000 | ) | |||||||||
Increase (decrease) in income taxes payable |
27,000 | — | ||||||||||
Net cash provided by (used in)
operating activities |
1,192,000 | (177,000 | ) | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(194,000 | ) | (312,000 | ) | ||||||||
Net cash used in investing activities |
(194,000 | ) | (312,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Exercise of stock options |
20,000 | — | ||||||||||
Net cash provided by financing activities |
20,000 | — | ||||||||||
Net Increase (decrease) in cash |
1,018,000 | (489,000 | ) | |||||||||
Cash beginning of period |
520,000 | 1,059,000 | ||||||||||
Cash end of period |
$ | 1,538,000 | $ | 570,000 | ||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
December 31, 2002
(Unaudited)
| 1. | Interim Reporting | |
| Chad Therapeutics, Inc. (the Company) is in the business of developing, producing and marketing respiratory care devices designed to improve the efficiency of oxygen delivery systems for home health care and hospital treatment of patients suffering from pulmonary diseases. | ||
| In the opinion of management, all adjustments necessary, which are of a normal and recurring nature, for a fair presentation of the results for the interim periods presented have been made. The results for the nine-month period ended December 31, 2002, are not necessarily indicative of the results expected for the year ended March 31, 2003. The interim statements are condensed and do not include some of the information necessary for a more complete understanding of the financial data. Accordingly, your attention is directed to the footnote disclosures found in the March 31, 2002, Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. | ||
| 2. | Inventories | |
| Inventories in 2002, are summarized as follows: |
| December 31 | March 31 | |||||||
Finished goods |
$ | 932,000 | 935,000 | |||||
Work-in-process |
1,472,000 | 987,000 | ||||||
Raw materials |
2,774,000 | 3,362,000 | ||||||
| $ | 5,178,000 | 5,284,000 | ||||||
| 3. | Earnings Per Common Share | |
| Following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per common shares: |
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| December 31 | December 31 | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Basic earnings per share: |
||||||||||||||||||
Numerator-net earnings |
$ | 228,000 | $ | 81,000 | $ | 408,000 | $ | 161,000 | ||||||||||
Denominator-weighted average
common shares outstanding |
10,073,000 | 10,053,000 | 10,070,000 | 10,053,000 | ||||||||||||||
Basic earnings per share |
$ | .02 | $ | .01 | $ | .04 | $ | .02 | ||||||||||
Diluted earnings per share: |
||||||||||||||||||
Numerator-net earnings |
$ | 228,000 | $ | 81,000 | $ | 408,000 | $ | 161,000 | ||||||||||
Denominator: |
||||||||||||||||||
Weighted average common
shares outstanding |
10,073,000 | 10,053,000 | 10,070,000 | 10,053,000 | ||||||||||||||
Dilutive effect of common
stock options |
291,000 | 685,000 | 328,000 | 420,000 | ||||||||||||||
| 10,364,000 | 10,738,000 | 10,398,000 | 10,473,000 | |||||||||||||||
Diluted earnings per share |
$ | .02 | $ | .01 | $ | .04 | $ | .02 | ||||||||||
CHAD THERAPEUTICS, INC.
December 31, 2002
(Unaudited)
| 3. | Earnings Per Common Share (cont’d) | |
| Options to purchase 551,000 shares of common stock at prices ranging from $2.75 to $13.47 per share and 447,000 shares of common stock at prices ranging from $3.14 to $13.47 per share were not included in the computation of diluted earnings per share for the three and nine month periods ended December 31, 2002 and 2001, respectively, because their effect would have been anti-dilutive. | ||
| 4. | Income Taxes | |
| Income taxes for the nine month period ended December 31, 2002, relate primarily to state income taxes which are provided for at an effective rate of 8.5%. The Company has federal and California net operating loss carryforwards of $423,000 and $2,640,000, respectively, against which a full valuation allowance has been recorded. In September, 2002, the state of California enacted legislation that suspends the utilization of net operating loss carryforwards during tax years starting 2002 and 2003, effective retroactively back to January 1, 2002. As a result, the Company will be unable to use its California net operating loss carryforwards until the tax year beginning April 1, 2004. | ||
| 5. | Geographic Information | |
| The Company has one reportable operating segment. Geographic information regarding the Company’s sales is as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
United States |
$ | 4,726,000 | $ | 4,446,000 | $ | 13,987,000 | $ | 13,575,000 | ||||||||
Canada |
70,000 | 38,000 | 175,000 | 233,000 | ||||||||||||
Germany |
21,000 | 12,000 | 39,000 | 346,000 | ||||||||||||
Japan |
49,000 | 113,000 | 166,000 | 236,000 | ||||||||||||
All other countries |
65,000 | 60,000 | 290,000 | 232,000 | ||||||||||||
| $ | 4,931,000 | $ | 4,669,000 | $ | 14,657,000 | $ | 14,622,000 | |||||||||
| All long-lived assets are located in the United States. | ||
| Sales of OXYMATIC® conservers and OXYLITE® systems accounted for 75% and 60% of the Company’s sales for the nine-month periods ended December 31, 2002 and 2001, respectively. |
CHAD THERAPEUTICS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 2002
Overview
The Company develops, assembles and markets medical devices that furnish supplementary oxygen to home health care patients. The Company was a pioneer in developing oxygen conserving devices that enhance the quality of life for patients by increasing their mobility and, at the same time, lower operating costs by achieving significant savings in the amount of oxygen actually required to properly oxygenate patients. The market for oxygen conserving devices has been significantly affected during the past several years by increased competition, consolidation among home oxygen dealers and revisions (and proposed revisions) in governmental reimbursement policies. All of these factors, as described more fully below, contributed to an erosion of the Company’s market share, as devices that were less expensive but which provided lower oxygen savings (or, in some cases, did not truly provide ambulatory oxygen) prospered in this environment. The Company’s market share for conservers was also affected by the introduction of competing devices that offered features not available on the OXYMATIC 301, which was the Company’s primary product in this market until July of 2000.
In 1998 the Company introduced the TOTAL O2 Delivery System, which combines the benefits of an oxygen concentrator with a system enabling patients to refill their portable cylinders. Initial sales of the TOTAL O2 system by home oxygen dealers were slowed by several factors discussed below.
In order to address this situation, the Company implemented a four-part strategy:
| • | Introdu |